Like-kind exchange: talk to your CPA first

Your Guide to State, Local, Federal, Estate + International Taxation

like-kind exchange, tax, real estate, CPAAs tax accountants, there is nothing we like less than hearing about a transaction after it has already closed, for example, a like-kind exchange. When we are only brought in after the fact, there is often nothing for us to do but report what already happened.

Tax planning is the most valuable service we can offer to our clients and that is only possible if we are consulted before a transaction. This applies to any major transaction, but is particularly important in the case of a like-kind exchange because there are so many questions that you should have answers to beforehand.

  • Do you really want a like-kind exchange
    • Using section 1031 to defer a gain is a great planning tool, but if your exchange results in a loss, it is usually more beneficial to take the loss currently, rather than deferring it.
    • Like-kind exchanges are not optional, so you will need to know how to avoid one if it makes sense.
  • Are you going to be receiving any boot?
    • Any cash or non-like-kind property you receive in an exchange will cause you to recognize a gain and you will need to plan for the tax on that gain.
  • Are you using a qualified Intermediary?
    • If you are engaging in a deferred exchange, you will need a qualified middle man to hold the proceeds and ensure the exchange doesn’t become taxable.
    • Henry+Horne has relationships with many qualified intermediaries that can help you, if necessary.
  • Are you aware of the time limits?
    • In a deferred exchange you have 45 days to identify replacement property and 180 days to acquire it.
    • If you don’t meet the time limits, you don’t get like-kind treatment.

These are just a few of the questions that you will need to answer before entering into a like-kind exchange, and a like-kind exchange is just one of the many major transactions your business can enter into. By letting your accountant know beforehand, we can ensure that you are taking advantage of the best planning strategies available and help minimize any tax payments. All too often we aren’t told about a transaction until it’s already done and at that point there may be nothing left for us to do but tell you how much you owe.

Michael Anderson, CPA